Talk about the new normal!  Bet you that 12 months ago, almost every one of us would complain about the government speak in the headlines.  What the heck (yeah, I know, most of us rely on WTF) does WFH mean?  Now, it rolls off our tongues like we've known this concept for decades!

I have written about this before.  Way back in June.  Those of us working from home (WFH) may find surprises as we file our income taxes.  Well, since we can start to file our taxes starting 27 January on Lincoln’s Birthday (12 February; the memo came out the afternoon of the 15th of January)  the problem is now immediate.

Many of us traveled to a different state each day that we worked.  (Typically, that would be someone who lived in New Jersey or Connecticut and worked in Manhattan. Less so are those among us in the DMV- DC, Maryland, Virginia neighborhoods.)   Sometime since the end of March, we all stopped commuting those long distances.  Now, we tread from bed to improvised office.  You know, about 200 feet, not 200 km.

Up until the pandemic, a  “convenience rule” obtained.  This “rule” stipulated that work done remotely (say for a Manhattan-based business) still took place in Manhattan, because the telecommuting was a convenience of the employee.

The six states that used this rule all had significant commuters to another jurisdiction, places like Manhattan, Washington DC, and Omaha, NE. (Yes, really, Omaha is one of such places!)

Once the pandemic hit, many of us actually moved to the hinterlands, since we didn’t have to worry about commuting into the office any more.  Why not live in a place where we can do what we want (as long as broadband internet is available) as we work from home.  (Of course, some employers recognized that too- and lowered pay rates for those no longer working and living in San Francisco, Manhattan, Silicon Valley,  and LA.)

And, now, that means we owe taxes to multiple jurisdictions.  Because our office is now in North Carolina, and not in Pennsylvania.    Since most states are suffering cash shortages (reduced sales taxes, reduced income taxes with so many unemployed, etc.), they are grabbing at any income that they can tax and collect revenues.

Several of my clients have found that out already.  Teaching in Cambridge (MA) and living in the District (DC) means that one must pay tax to Massachusetts and DC.  And, while one may own their primary home in DC, it is cheaper to claim MA as the primary domicile (due to the proportion of income obtained from that state) and list DC as part-year residence.  (In this case, the taxpayer only is in DC on most weekends, and about 100 other days in the year.)

But, wait a minute.  In 2020, this professor is working from his home in DC.   So, his professorial salary is now DC-earned income.  Of course, Massachusetts will claim that as MA earned income.  But, maybe not. (Yeah, I am ready to sell a bridge in the desert to you if you believe in that tax fairy story.)

Because about 12 states are suing Massachusetts (they are joining the suit filed by New Hampshire) to cause it to cease taxing folks that live remotely.  These folks used to commute to jobs in MA, but now work from home.

It’s not clear if the Supreme Court (SCOTUS) will take up the case, but that is the place to go when the states want to duke it out in court.   (You see, Congress has never set the rules for interstate taxation.  Oh, it said it would- but never has.  Another function Congress shirked.)

The current holding is that states have the right to tax non-residents, as along as the employee has a substantial link to that state, that it taxes income that is apportioned fairly, and the income is clearly derived from the state’s physical domain.

The general rule has been to tax “commuters” based upon the number of days worked in the state.  But, this year?????!  Massachusetts stated that just because folks stopped commuting due to the pandemic doesn’t mean it needs to lose money- it will tax those folks as if they still do commute.

New Hampshire sees this lawsuit as a means to have MA firms relocate to New Hampshire, as well as folks from the Commonwealth (of Massachusetts, silly) looking for a cheaper place to live.  (After all, these folks are no longer tied to offices based in Massachusetts.)

Of course, Massachusetts responded that they are just maintaining the status quo.   Moreover, any taxpayer who felt they had been improperly taxed can sue in Massachusetts- not in the Supreme Court.  (Yeah.  Exactly that.  Like a resident can win against the Commonwealth without spending more than the taxes that would be collected.)

But, the real issue turn out be among those places like New Jersey and Connecticut, and not New Hampshire.  After all, New Hampshire does not have an income tax.  New Jersey and Connecticut do.  New Jersey credits residents about $ 3.7 billion for taxes paid in New York (an average per capita of about $ 8600 for the 435K commuters).  Connecticut loses about $ 1.3 billion to New York and about half that to Massachusetts. (Connecticut and New Jersey residents provide about 10% of the total taxes collected by New York.)

The problem is that this case will not be settled in time for us not to be caught up in that web.   (You can bet Congress won’t act on it either.)

Happy tax season to you, too!